Nice & Simple Explanation of the Credit Crisis

By now, most of us have some sort of idea of what caused the current financial crisis. Some notable attempts at a simplified explanation include these Powerpoint slides with stick figures, this British comedy routine, and the “Giant Pool of Money” NPR audio broadcast. Even the New York Times had a go.

Well, here’s one more by Jonathan Jarvis, which also happens to be excellent. If anything, it surely has the best animation and graphics of them all. Also available in high-definition (but it’s big). Via Bogleheads.

Comments

  1. The entire video is on http://www.crisisofcredit.com

  2. That was great- Thanks

  3. Indeed. Excellent and clear. Thanks!

  4. That was pretty good. As someone who has very little understanding in the housing and credit markets this made perfect sense to me. Sounds like people were getting greedy. Whatever happened to the days when you dealt with just one person/bank who loaned you the money?

  5. Overweight smokers with at least four children will be highly offended by this.

  6. So according to the graphic, one of the traits of the less responsible homeowner is having more kids.

  7. Don’t forget those with heart tattoos… :) Even before the graphic popped up, I thought to myself “how is he going to portray irresponsible adults without offending someone”? How would he do better? If you have a good idea, I’d e-mail him and maybe he’ll change it.

  8. Garbage. Not one mention of the Community Reinvestment Act and how the government forced banks to lend to uncreditworthy minorities through regulatory bullying.

    Hilarious that the video mentions that housing prices were going up and up as if it were some sort of accident of nature. What created this housing bubble? A flood of demand, artificially created by loaning too much money at low rates to people who had a history of NOT paying back their loans.

    There’s plenty of blame to go around – from the orginators, banks, and homeowners who borrowed about their means. But at the heart of it is free market interverence by big government.

  9. It is also irresponsible to be heavyset and smoke, apparently.

  10. Chris in Boston says:

    The video is ok. It’s actually almost anti-capitalist. They portray the investors as fat cats.

    It completely glosses over the political clout that attacked the banks to make risky loans

    Eric, I agree with your comment “Not one mention of the Community Reinvestment Act and how the government forced banks to lend to uncreditworthy minorities through regulatory bullying.” However, not all minorities are uncreditworthy. Lets not make this a race issue. To simply say “uncreditworthy borrowers” would fully explain how the CRA was the root of this problem.

  11. And apparently Sub-Prime borrowers also drink slurpies…

    Great animation though… I actually thought the sub-prime graphic was dead on… : )

  12. Don’t believe everything Rush Limbaugh tells you. This was not caused by the government forcing loans to minorities. That is laughable.

    I remember my sister trying to talk me into buying a home in her expensive neighborhood. She said her neighbors were all getting interest only loans that they were planning on refinancing after their kids were done with daycare. I knew plenty of white middle class people with the same mentality. The government didn’t do this. This is squarely on the irresponsible American public.

  13. This is pretty good but simplistic and leaves out alot. If interested I would encourage people to watch House of Cards with David Faber on CNBC and go to http://www.realclearmarkets.com and read Vanessa Drucker’s How the SEC killed Wall Street.

    The problem with the above is that it leaves out way too much. This problem has lots of contributers. Starting with out of date rules and laws, and yes the C. R. A. started by Andrew Cumo during the Clinton years was part of it, also remember that Janet Reno sent out a memo to the major banks at the time stating that if they did not comply she would file charges, also Clinton , Robert Rubin and others took specific steps to see that CDO’s were not treated as insurance and therefore could not be regulated. Also with the help of Republicians Clinton repealed Glass-Steagle Act, this also played a part. Bush came along and didn’t stop C.R.A. and while Barney Frank and Chris Dodd who both got big money from Fannie Mae and Freddie Mac (also Fannie and Freddie ‘s CEO’s walked away with millions ) blocked any reform efforts there Bush and some Republicans tried to refom the 2, but only half hearted probably because some Republicans were getting PAC money from them also.

    Then in 2002 in a 1.5 hour meeting referenced in the article I mentioned the SEC removed all restrictions on leverge for investment banks it had been 13, I think Soon some of them were leverged up to 40 or 50 times.
    Next is the rating agencies which were being paid by the very companies that owned the securities to rate the same securities, just a bit of conflict of interest.
    The biggest colprit though in my opinion were the store front mortage companies that got paid for each mortgage they wrote, as soon as they wrote it they sold it and so they didn’t care if it got paid back or not they got their money. In David Faber’s piece one of these guys said that if you could breathe and cause a fog on a mirror you could get a mortgage. This same guy said he had no guilt and did not thiunk he had done anything wrong. Incidently, the head of Auto Nation a car dealer said he knew there was a problem when a customer they had qualified for a mortgage but not a car loan??

    Last but certainly not least are the people who took these loan many knowing they could not pay them back, not asking any questions about paying them back before signing, or setting themselves up to be able to pay back if eery single thing went right and there were no unexpected changes in their life or income.

    The shocker for me in all of this is that not one soul accepts any blame. Socialogists describe an event where a mob attacks someone and they all kick and beat the person to death, in the end the person is dead but everyone in the mob denies being the one who killed them. This is essentially what happened to the mortgage industry.

  14. auntie_green says:

    In one circle, I said that it was irresponsible people who did this, and was told I was insulting

  15. Can we all agree that the cause of this was simply greed? Whether you were the investor looking for the high return, the banker or financer looking for a high comission, the mortgage broker or real estate agent looking to build his business, and yes, the American public who wanted a bigger and better home. Fighting over whether or not it was the public or the government or big business drives me nuts. Everyone got greedy and everyone got burned.

  16. Re: the Credit Reinvestment Act comments. If I recall, CRA is geographically based, meaning banks are encouraged to provide mortgages, banking services, small business loans, etc. in areas that were historically underserved (i.e. redlined).

    Those areas where foreclosure rates are the worst (Stockton, CA, Riverside County, etc.) weren’t ever redlined, b/c they were mostly made up of vacant land.

    As an aside, anyone who works in affordable housing or similar community development industry will tell you that CRA is more of a means to get banks to talk to you than a mandate.

  17. Greed is correct but beyond that free markets and capitalism require a level of integrity and character and a rule of law to at least curb or corral those lacking these things.

  18. The root cause of the credit crisis is the Federal Reserve. This video hinted at that fact by mentioning Alan Greenspan. The Fed is simply the wrong system, and it goes against the principles of the free market. It was sneakily established in 1913 and we don’t need it: the Fed only makes things worse.

    Here’s how to fix the problem:

  19. Sorry, no, we can’t all agree it was greed.

    Greed is, by definition, a desire, not an action. It is how we ACT upon that desire that produces results……or in this case, consequences.

    Greg has it spot on! Short of capitalism with true integrity, there needs to be laws in place to stop something like this.

    The responsibility for this problem starts at the top and goes down.

    It plays very much like an “if/then” statement and somebody failed to assess the correlation with ANY character, integrity or rule of law!

  20. As a social studies teacher, I was looking forward to using this in my class, but hope the portrayal of “irrisponsible people” doesn’t offend any students. I know a lot of them would most relate with this group. I also think this group is perhaps the least responsible for what happened. the “irrisponsible group” should have 4 cars, 2 kids, maybe 2 homes, 2 boats and a bunch of credit cards.

    people who are not credit worthy should not have been given loans. That blame should rest at the credit agencies. Thats why they exist.

    I disagree that “everyone got greedy.” Many people got greedy, but almost everyone paid the price unless they saw what was happening. Even people who thought they were acting responsibly and making sound investments got burned.

    Don’t forget that there was a fair amount of deception, complexity, and obscurity in the lending and securities market. Lack of oversight facilitated and encouraged greed, not big government helping minorities.

  21. I don’t think it was all greed. To be sure, there was a lot of greed. But I think a lot of it was also fear. Fear that if you didn’t jump on the “property ladder” then you’d be left behind. So when that 0% down mortgage came along, people were hesitant to say no?

    The big underlying assumption was still, housing prices never go down. If that stayed true, ARMs could be refinanced, etc. and even foreclosures would still be acceptable/profitable to banks. After that assumption was broken, it all fell apart.

  22. Okay, so not all of it was greed… but i think that all of it was IRRESPONSIBILITY on all parts.

  23. Gordon Gekko says: “The richest one percent of this country owns half our country’s wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It’s bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now you’re not naive enough to think we’re living in a democracy, are you buddy? It’s the free market. And you’re a part of it. You’ve got that killer instinct. Stick around pal, I’ve still got a lot to teach you.”

  24. Gordon Gekko says:

    Gordon Gekko says: “The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.”

  25. financePHI says:

    While over-simplified, it does make a simple explanation of things that the average American will find helpful.

    We need more of this type of video being posted throughout the internet. Thanks for the video!

  26. I reccomend the Academy Award winning documentary The Inside Job for a comprehensive explanation of the crisis from start to finish. They manage to humiliate big-shot policymakers too! (The film is by Charles Ferguson).

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